"To get rich is glorious." -- Deng Xiaoping. This is perhaps the smartest thing ever uttered by a member of the Communist Party.

Sunday, October 17, 2010

Confronting Robert Frank

Writing in today's New York Times, economist Robert Frank attempts to make the case that income inequality should be regarded as a grave public policy problem. Like Steven Pearlstein before him, Frank's logic is baffling and unconvincing, essentially arguing that inequality to leads to everything from financial distress to long commute times and low public support for government spending on essential infrastructure. Here are some highlights from the meandering mess:

People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.

First off, the last sentence in the second paragraph is not true. Spending cascades do not make it more expensive to achieve basic financial goals. Basic financial goals, such as a comfortable retirement and purchasing a house, are entirely dependent upon one's income and ability to save and invest. Saving and investing are not dependent upon the actions of others, but rather one's own choices. What other people are doing is irrelevant.

As for the rest of it, I have no idea if people are actually shifting their consumption pattern upwards in an effort to "keep up with the Joneses" or those in the socioeconomic class just above them. I suppose it is plausible, as I have known plenty of people who appear to live beyond their means. But so what? Should the rich be punished because of the inability of others to make sound financial decisions? I'll also note that the underlying logic here is that people are stupid, can't be trusted to make their own decisions and smart people like Frank should set public policy so that temptation is removed from them, even if it comes at a cost to someone else.

Frank then trots out this argument:

Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work. The counties where long commute times had grown the most were again those with the largest increases in inequality.

It's difficult to even know where to start with this one. First off, commutes are not entirely a product of housing prices. Plenty of people in the Washington DC metro area, for example, could afford houses in the city but choose to live in the suburbs and commute to the city because of the difference in public school quality, and thus endure longer commutes. Second, areas of more affordable housing in the city often suffer from high crime rates, which also pushes workers further out into the suburbs.

Third, and perhaps most significant, increasing the supply of housing (and thus reducing prices) in the city is no easy feat thanks to heavy regulation such as zoning, density limits, affordable housing mandates, historic designations which limit development and height restrictions. Indeed, compare cities with the longest commute times to those with the shortest and some patterns emerge. The cities with the longest commutes are all found on the East and West coasts in "blue" states that likely favor heavy government regulation, while those with the easiest commutes are in "red" states where land is plentiful and almost assuredly subject to fewer restrictions on its use.

All three factors have nothing to do with income inequality and everything to do with poor public policy.

This brings us to Frank's final, and possibly most bizarre, argument:

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

Huh? Seriously, who is out there railing about government spending on crumbling roads and bridges? (Please don't conflate criticism of the stimulus package as an argument against infrastructure. The stimulus was criticized because the emphasis was on spending the money as quickly as possible, likely funding plenty of unnecessary pork-barrel projects. No one is against repairing a teetering bridge.) Where is the evidence to support this assertion? Further, despite this alleged reduced willingness to support spending on infrastructure we certainly haven't seen a decline in government expenditures on transportation at the federal level:

Whatever the government is hurting for, a lack of money isn't it with a budget over $3 trillion. This extends to the Department of Transportation, whose budget increased in constant dollars from around $35 billion in 1975 to over $65 billion 30 years later. That's about an 86 percent increase at a time when the country's population increased by around 37 percent. And does anyone think that state level spending on infrastructure declined during that time? If our roads are in poor condition it is plainly due to an inefficient bureaucracy, not a lack of money.

To address Frank's other worries about rail and container security, I should also add that our deregulated cargo railroads are among the best in the world while the past decade saw the establishment of a new government program to address security as the nation's ports (whether it is effective I do not know, but its establishment would seem to suggest that money is being devoted to the effort).

If this is the best that inequality worriers such as Pearlstein and Frank can offer up, I remain convinced that the issue is a non-problem being ginned up simply to raise support for higher taxes and more government meddling.

1 comment:

Eggsellent analysis. I was appalled by the logical inconsistencies of the article, and it's condescending tone. Why are these clowns always concerned about what the rich have? Why not think about not impeding others on their paths by imposing draconian income tax rates.